Google (NASDAQ:GOOG) is set to release its Q4 2012 earnings Tuesday, January 22. The company had an eventful third quarter earnings release, which saw the stock drop over 10% on that trading day. In its Q4 earnings release, the focus will once again be on the progress Google has made in its mobile business. Additionally, we will track the company’s progress with its non-core products such as Youtube, because we think that it is important for Google to diversify its revenue base going forward.
Recap Of Earnings In Q3 2012
For Q3 2012, the company reported consolidated revenues of $14.1 billion, up nearly 45% year-over-year. However, Google’s core revenues only grew to $12 billion, a growth of 18% year-over-year. The large difference in the two percentages occurred because Google reported no revenues for Motorola in 2011, but reported revenues of $2.6 billion in Q3 2012. The company’s consolidated operating income was hurt, too, which fell to $2.74 billion from $3.06 billion in 2011. It also reported a significant jump in traffic acquisition costs as a percentage of advertising revenues -- 26% in Q3 2012 versus 24% in 2011. Additionally, as a result of Google’s push into mobile advertising, the company’s cost-per-click dropped 15%, but there was 33% growth in aggregate paid clicks. This combination led to a 16% increase in advertising revenues.
Mobile In Focus For The Long Term
During Google’s Q3 earnings call, CEO Larry Page reiterated the company’s focus on its mobile and social products. In our opinion, these product lines are key for Google over the long term because over time, more users will access the web via smartphones than personal computers.
Google, like other Internet players, has had a difficult time monetizing its mobile user base. Therefore, during this quarter’s earnings release, we will be closely watching Google’s mobile advertising run-rate, which quadrupled year-over-year in the third quarter to $8 billion from $2.5 billion.
Since the average revenue per search is lower on the mobile platform, mobile search growth will continue to weigh on the average cost-per-click metric that Google reports for its business overall. We aren’t too worried about this yet, since there is a big disconnect between the amount of time a user spends on mobile phones and the proportion of advertising spending on the mobile platform. We think that mobile advertising spending as a whole will increase in the coming years, and Google’s position in the market will help it capture a material chunk of the ad spending.
YouTube’s Revenues Provide Some Diversification To Google
Google’s YouTube business has much different dynamics than the company’s search business, and we think that it offers much needed diversification to Google’s overall revenues. According to our estimates, the division constitutes approximately 8% of Google’s value. Revenues from this division were around $1.5 billion in 2011, and we think that they will continue to increase and hit around $15 billion by the end of our forecast period. YouTube has been solid over the past year, as yearly account sign-ups on the site doubled year-over-year in Q2, and users are said to be uploading 42 hours of video every minute. We will be closely watching for any new numbers regarding YouTube during this earnings call because of its importance as a diversifying factor to Google’s overall revenues.
We currently have a $691 price estimate for Google, which is approximately 5% below the current market price.
Disclosure: No positions.